PRIVATISATION AND BANKING

Sarajevo Mar 23, 1998

FOREIGNERS HAVE NO FAITH IN THE STATE

AIM SARAJEVO, 18 March, 1998

The question whether the B&H Federation will after the pending general privatization have several dozens of small private banks and one large state bank, or will the state, in accordance with its official commitments, be definitely divorced from the economy, will be decided in a "battle" currently fought behind the screens between the Federal Government and the international financial institutions.

The main subject of the dispute is the Federal Investment Bank, founded late last year with state capital by a decision of the Government of the Federation of Bosnia and Herzegovina. As it was pointed out at that time, the basic objective of establishing this bank was to concentrate at one place assets which will be accumulated with the repayment of credits approved to domestic enterprises from funds for the rehabilitation of B&H. By concentrating them the state would get an opportunity to intervene financially in those sectors and enterprises for which the donors are not much interested but which are, according to the authorities, of strategic importance.

The assessment that the international community doesn't want to invest in most of the large national enterprises, which employ the majority of labour force, is basically true. However, on thing is forgotten, i.e. that these enterprises are almost wholly owned by the state and the foreigners will not have anything to do with it when it comes to business and profit.

Although at the opening of the Bank it was pointed out that representatives of international financial institutions had nothing against this concept, the latest reactions of the "foreign factor" show that the concept of a state bank is, after all, out of the question.

"It is rather strange that the Government is at the same time trying to carry out privatization of the existing state banks but also to establish a new one. That new Federal Investment Bank sounds like something from distant past. It is supposed to operate in a way which the modern experts consider to be wrong. A similar bank existed in former Yugoslavia, but with the disintegration of the state the banking system also fell apart. In this way the Federal Government would have too much influence on the Bank, while the distribution of funds would be based on political and not economic grounds. In other words, certain percentage would be allocated for the Croatian and yet another for the Bosniac regions in the Federation. Also, percentages would be set aside for agriculture and heavy industry. This is a pre-historic approach to banking. It sounds as a rather dangerous method - something which has once already caused the destruction of a banking system", said Rory O'Sullivan, Director of the World Bank's Standing Mission to B&H.

Fears that such large concentration of funds in one place and under the state control could be used primarily for attaining political rather than economic objectives are not totally unfounded because members of the Bank's Managing Board are also the leading men of the Federal Government and, at the same time, high officials of the ruling SDA and HDZ.

That is why the World Bank, but also other financial experts, demand privatization of the Federal Investment Bank simultaneously with other banks.

"We are not against privatization of this Bank, but against its privatization in this way. We want to do it through additional capital inflow, i.e. investment of fresh private capital. That means that if this Bank has 30 million DEM worth of state capital, we would have nothing against private capital taking over the control of the Bank by investing additional 30 - 40 million DEM", said Nedeljko Despotovic, federal Minister.

"The existing lines of credit have been very successful and 95 percent of them were repaid. We would like to keep the same rate of credit repayment in the future. I am afraid that this Bank would be politically oriented and would therefore deny many businessmen access to capital. This Bank should not become a deposit institution as these deposits could be easily "swallowed" by the Government thus leaving the business sector without these funds. If this Bank is not privatized then, in our opinion, much money would be lost because of political investments and B&H cannot afford such behaviour.

Do not forget that we have invested about 80 million DEM in projects which proved very successful and that these funds are being repaid to the Federal Government now. We are speaking of some 80 million DEM which will be available to one or perhaps several banks, for further lending to enterprises. And, if invested well these 80 million could become 300 million, but also vanish in some hopeless project and serve as a political encouragement to various groups. As far as investments are concerned that would be a sheer loss. I do not say that this will necessarily happen, but only that it has to be avoided", added Rory O'Sullivan.

It is clear that the resources for the reconstruction of Bosnia and Herzegovina which were invested in domestic enterprises in the form of credits, will continue to circulate in the years to come so that all this could be viewed from another angle. Who will "skim the cream" from the investment of these resources?

Within the World Bank credit line for small and medium enterprises alone there were originally 30 million USD available. Bearing in mind the fact that about two million dollars are repaid each month for the already approved credits, it becomes clear that this is not the question of "petty cash".

"I do not see why should one bank with smaller or larger share of state capital in Bosnia and Herzegovina be such a problem when there are similar banks all over Western Europe", wondered Minister Despotovic.

Obviously different interests and motives were at play in the game concerning the Federal Investment Bank. The federal officials told us off the record that behind the demands of international financial institutions for divesting the Federal Investment Bank of powers is the intention to establish some new bank with minimum founding capital of about 2.5 million DEM which would take over the "circulation" of these ten million DEM as well as the accruing profit.

In addition, in informal conversation the federal officials disclosed that in all this they could discern the fear of the "international factor" from the excessive strengthening of the B&H Federation which, in the opinion of the local power-holders, is not in accordance with their long-term plans.

One things remains unclear in this whole story about one strong bank capable of initiating capital investments in the national economy with the available assets, which is no doubt, necessary.

Such a bank already exists in B&H - The Bank for Reconstruction and Development, established in 1996, and not burdened by problems of the past and in which the state is also a majority shareholder. However, the Federal Government readily agreed to the privatization of this bank deciding to "make" itself a new bank.

What will be the outcome of swords measuring between the Federal Government and the international financial institutions regarding the destiny of the Federal Investment Bank remains to be seen. For the time being, no one is showing any signs of readiness to give up its demands. The World Bank, but other international institutions too, insist on the same arrangements agreed for other banks in the Federation of Bosnia and Herzegovina - in other words, its privatization. On the other hand, the Federal Government will not easily let its trump card worth several dozen millions of German Marks slip through its fingers.

Officially, in its distribution of funds the Federal Investment Bank should be primarily guided by economic criteria. In such a case, it would not matter much who is the majority owner. The only question is whether the current authorities will be capable to meet the challenge facing them - to attempt to achieve some specific political benefits by investing these funds. In any case, when money is in question, the foreigners have no faith in the state.

Drazen SIMIC

(AIM, Sarajevo)